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COMMODITIES IN FOCUS

4

Managing logistics and email fraud risks in global supply

chain

In this article

KT Fung

reviews logistics, contract and fraud risks involved in the delivery of goods from buyers to

sellers in order to avoid costly misunderstandings, and he provides some precautionary advice.

The collapse of Hanjin Shipping, the world's seventh largest container carrier, has sent

shockwaves through the global shipping industry since it filed for bankruptcy at the end of

August 2016. The demise of the South Korean shipping giant demonstrates the risks that are

inherent in the trading industry and the importance of using International Commercial Terms

(”Incoterms”) correctly by sellers and buyers.

Sellers tend to neglect potential risk factors in their

quest to grow business. The Hanjin case illustrates

the risks faced by sellers when entering into purchase

and sales agreements, credit insurance contracts and

marine cargo insurance policies. It also reveals the

importance of correctly using Incoterms and how

their misuse can lead to a stark contrast in the

seller’s available recourse to seek payment from the

buyer.

“The Hanjin case illustrates the

risks faced by sellers when

entering into purchase and sales

agreements, credit insurance

contracts and marine cargo

insurance policies”

Proper use of Incoterms to minimise

logistics risks

There are 11 different Incoterms which are divided

into four groups (E, F, C and D). First of all, under

the term EXW ('Ex works'), risk is transferred to the

buyer when the seller has made the goods available

to the buyer at the seller's premises. Other terms

include FOB ('Free on Board'), under which risk

passes from the seller to the buyer when the goods

are loaded onto the ship; CFR ('Cost and Freight'),

under which the seller arranges and pays for the

carriage of the goods up to the port of destination;

and CIF ('Cost, Insurance & Freight') with the

additional requirement that the seller must cover

insurance for the goods.

Under FOB, CFR and CIF terms, the risk of damage to

goods does not pass to the buyer from the seller until

the goods are loaded onto the vessel. In other words,

the seller is liable for damage to the goods arising by

whatever reason while they are in storage or transit

before being loaded onto the ship. As with the Hanjin

case, even if the buyer had purchased insurance, he

would not be able to make a claim due to lack of

insurable interest if the goods were damaged while

stranded in port due to the delay in the arrival of the

loading ship at the port of loading.

Therefore, for container shipments, it is advisable for

sellers to adopt FCA ('Free Carrier') terms. When FCA

terms are adopted, risk of damage to the goods will

pass to the buyer when the container is delivered to

the container terminal, and will be insurable under

the buyer’s insurance policy. In the event that goods

are damaged before being loaded onto the deck of

the ship, the buyer can submit a claim under their

marine cargo insurance.

In fact, when the latest version of the Incoterms was

published in 2010, the International Chamber of

Commerce advised that it would be more appropriate

to adopt FCA, CPT and CIP instead of FOB, CFR and

CIF for container shipments as they offer more

freight insurance coverage at no additional cost.

There are 8 Incoterms in the E, F and C groups, being

shipment contracts, in which the buyer assumes

subsequent risks once shipments are effected

pursuant to the relevant Incoterms. The buyer is

obliged to pay the seller even if the goods are not

received by the buyer after delivery for whatever

reason. As for arrival contracts adopting group D

Incoterms, the seller only discharges its delivery

obligations when the goods are delivered to the

agreed destination. These terms include DDP

('Delivered Duty Paid'), DAP ('Delivered at Place') and

DAT ('Delivered at Terminal').